Compiling a Business Plan for a Commercial Aquaponics Project Part 2

Planning your production and Financial Modelling:

Using information developed in the market analysis about the customer values, needs, and preferences, describe the products to be offered and how they will compete in the target market. This could be a list of specific products (collard greens) or a list of general classes of products (greens). Product offerings should also include the seasonal availability of the products. Describe the specific characteristics of the product that meet the needs of the target market. For example, the market segment desires fresh, organically grown produce from local suppliers or the specific product is not available in the current market. Discuss why the products offered to each market segment are unique. Attributes such as locally grown, organically produced, and price serve to differentiate a product and make it unique. Finally, describe why the business is different from its competitors. Attributes such as being a local employer, accessibility to customers, and partnerships with local businesses help to describe the uniqueness of your business.

Consider the following questions:

• What products will be offered?
• What is the product availability (seasonal offerings)?
• Why would a customer prefer your product to a competitor’s?
• What differentiates your product in the target market?
• How does your product differ from that of your competitor’s?
• What are the strengths and weaknesses of the product?

Using information developed in the market analysis about the average product consumption, geographic location, and customer attributes, needs, and preferences, develop simple sales projections for each market segment. Since various crops may be seasonal, describe when and how long product will be available for each market segment. For example, products may be available for a market segment all year or only on a seasonal basis. Remember you can only produce the volumes/numbers inline or according to the growth capacity in your system. Compile your production plan accordingly by populating the numbers you plan to produce on to the copy of the Commercial Aquaponics Excel spreadsheet at the Sales Forecast. The top section allows you to fill in the number of plants forecast to produce per month from January to December. The bottom section allows for the price of the products to be added to calculate the sales income per month.

Financing your project:

Financing has been difficult for many aquaculture businesses. This is primarily because aquaculture has been considered a risky enterprise by many lenders. Consequently, interest rates on aquaculture loans have tended to be higher and terms of lending more stringent than for other types of loans. Conventional loans may not be available at all for aquaculture businesses in some areas because lenders are too uncomfortable with the business. A lender who does not understand the production system, expected patterns of cash flow and price fluctuations will tend to be unwilling to extend credit without a substantial level of financial security to back up the loan.
Not all capital for aquaculture businesses is obtained from traditional lenders. Some agricultural operations also obtain capital in the form of outside equity. Equity capital in agriculture has been obtained mostly from retained earnings from the business, inheritances, and gifts. However, equity capital can be obtained in other ways. Partnerships, joint ventures, and family corporations can be used to pool capital and provide a source of equity capital. Some equity capital can be available from outside investors seeking to shelter high nonfarm income from taxes.

Because new equity must come from either the current owners or new investors, it is important to understand the costs involved. Current owners can provide equity capital through investing the earnings or profits from the business back into the business or by investing capital earned through other sources. Outside equity capital can be obtained by adding partners into the business.
Investing the profits from the business back into the business also represents a cost to the business, even though there is no definite repayment schedule. The cost of reinvesting retained earnings is a type of opportunity cost that has been referred to as the required rate of return to compensate for the investment options that are forfeited.

Equity capital frequently ends up being more expensive (after taxes) than debt capital. This is particularly so when the cost of retained earnings is considered, as it should be in a complete analysis. The costs of debt capital include the interest paid along with any loan settlement costs. Loan settlement costs can include points charged at the initiation of the loan, any transaction fees, fees for credit reports, and any insurance premiums that are required. This cost is the difference between the funds that are received by the borrower and the total funds used to close out the loan.

Investment Analysis:

Capital is often the most limiting of resources used in aquaculture over the long term, and the efficiency of its use in the business is an important consideration. Over time, any resource can be acquired with capital, if sufficient capital resources are available. Theoretically, a farm could be tripled in size by buying more land and purchasing other farms, or it could be cut in half by selling off half of its ponds. However, the scale of operation can be altered similarly by adding equipment to intensify and produce more per hectare as opposed to expanding hectares. It is critical for the manager to evaluate the best uses of the capital available to the farm.

There are two broad categories of capital in any business: operating and investment capital. Operating capital is the capital used to cover the annual operating expenses while investment capital is the long-term capital used to acquire “capital goods”. Capital goods are those that will be used over time, typically for a period of more than a year. Capital assets such as land, equipment, and ponds typically involve a large initial expense with resulting returns spread over several future periods. Time is not a major issue for examining annual operating inputs, but it is of importance when analysing the profitability of capital assets. Capital assets often involve large amounts of money, and the returns are received over many years and at different time periods, sometimes at irregular intervals. Thus, careful consideration of the size and timing of the annual cash flows over the years of useful life of the investment is important.

Analyses that estimate the profitability of the uses of capital invested in an aquaculture business over its business life are referred to as “investment analyses”, or sometimes as “capital budgeting”. An investment is an addition of a durable or capital good to a business. Thus, investments add noncurrent assets to the business. These types of assets have long-lasting consequences. Investment analyses determine the profitability of spending funds on capital assets (those that will be used for more than 1 year). Investment capital has characteristics and properties that differ substantially from operating capital. Thus, the analytical methods used to evaluate investment capital decisions differ from those used to evaluate operating capital.

The bottom-line measure obtained from an investment analysis is the profitability of the investment over its useful life. However, there are a few different types of methodologies for investment analysis and each result in the calculation of a different indicator as its bottom-line measure. The most common types of investment analyses are: (1) payback period; (2) simple rate of return; (3) net present value (NPV); and (4) internal rate of return (IRR). Each of these is named for the indicator that is calculated as the bottom line of the analysis. In aquaculture, there are many decisions for which a formal investment analysis should be made. The purchase of an aquaculture business is a major investment expense and its profitability over time should be analysed thoroughly.

Value Chain:

Firm Infrastructure: Infrastructure supports the entire value chain and not just the individual activities. General management, planning, finance, accounting, legal, government affairs, and quality management are crucial in any company, even in small, commercial aquaponics. All these activities can be concentrated on one person, distributed in many areas, or even attributed to consultants or third parties.

Human Resources Management: Human resource management supports not only
the direct hiring of people but also the possible broader scopes such as labour negotiations. The main related activities are recruiting, hiring, training, development, and compensation. Without qualified people managing, overseeing, and operating the business, it is not likely to succeed, especially in such a knowledge-intensive endeavour as aquaponics.

Technology: The array of technologies employed in most firms is very broad, ranging from those technologies used in preparing documents and transporting goods to technologies embodied in the product itself. Technology development consists of a range of activities that can be broadly grouped into efforts to improve the product and the process, also known as research and development (R&D). For such an innovative undertaking as aquaponics, R&D is a constant activity, especially in high-technology systems with extensive equipment and controls.

Procurement: Procurement refers to the function of purchasing the needed inputs.There can be recurrent purchases such as feed and seeds but there are also important assets such as greenhouse and laboratory equipment. Improved purchasing practices can strongly affect the cost and quality of the purchased inputs. The activities associated with receiving and using the inputs and interacting with suppliers are also within the procurement’s function.

Internal Logistics: Items that are purchased also require activities associated with receiving, storing, and disseminating the inputs to the product, such as material handling, warehousing, inventory control, vehicle scheduling, and returns to suppliers.The conditions for storing seeds or young plants, for example, need to be well monitored with controlled environments.

External Logistics: These are activities associated with collecting, storing, and physically distributing the products to buyers, such as finished goods warehousing, material handling, delivery vehicle operation, order processing, and scheduling. The external logistics of this can be very simple or very complex depending on the defined distribution channels through which each product is pursued.

Sales & Marketing: Especially for such a novel system as aquaponics, these activities can be the main focus as they dictate the revenue that will be collected. This entails providing a means by which buyers can purchase the product and inducing them to do so through advertising, promotion, salesforce, quoting, channel selection, channel relations, and pricing.

Services: If a part of the revenue stream comes from selling knowledge, the service section might entail many of the activities. Even if there are no explicit service sales, there are still activities associated with providing service to enhance or maintain the value of the product, such as installation, repair, training, parts supply, and product adjustment.

Operations:

Within the value chain are all the operations activities that are associated with transforming
inputs into the final product form. A production calendar with adequate planning of when to buy the inputs and when to sell the outputs (if applicable) needs to be established to have a correct plan for resources, costs, and revenues. This calendar will provide the values needed for the Cash Flow that will be presented in the following section.

Fish or relevant aquatic organisms: All the activities related to feeding, maintaining, controlling disease, and harvesting, packaging, and dealing with the fish residues need to be accounted for. The fish species and breeding or buying options need to be carefully chosen and accounted for because of specific needs (temperature, pH, protein, spacing, etc.) and possible outcomes (weight and time at harvest and potential losses).

Plants or relevant organisms: There are numerous possibilities of ways to grow greens in many different systems (NFT, media beds, aeroponics, coupled, decoupled, etc.). These systems have been extensively researched. The choice will influence the space and inputs needed, as well as the time and personnel commitments. The system type will also determine the frequency or need for the substrates and nutrients. If there is a need for or choice of using a controlled environment, such as a greenhouse, additional carbon dioxide can also be used, albeit at a cost. If the chosen species require pollination, such activities and related costs must also be accounted for.

Synergies: An aquaponics system will have inherent microbiota for the transformations to occur permanently and on-demand coupled systems vary in the ways these synergies are integrated. The chosen technologies and automation levels will dictate not only yields but also requirements, investment needs and the recurring costs associated with them. Independent of which system design is used, all will require energy, water and at least some controls.

Viability:

To make an investment analysis, three basic facts need to be understood:
(i) any asset is only valuable if it generates cash flows, (ii) the timing of the cash flows is important, and (iii) investors are averse to risk, so all else equal, they will pay more for certain rather than risky operations. Financing the business will most likely be needed because the investments occur before the revenues. This can be financed in many ways and the correct path depends on the business case’s economic analysis. The investment needs to give the desired return to all the stakeholders involved. In a small company with only one owner, the only stakeholder is oneself. However, most companies have many stakeholders with different expectations of the value of their money.

Conclusion:

The intent of this section was to elucidate all the possible elements that can be of risk to the viability of a business. Testing different scenarios of fish or plant species, system types, market prices and strategies will help users to make fewer mistakes along the way by creating a successful aquaponics venture. This guide allows for experimenting with trial and error, which is best conducted during a planning phase where the costs are much lower than when the system is operating. This practical guide, intended to help leverage profitable commercial aquaponics businesses throughout the world, was based on the accumulated knowledge of the cited researchers within the different fields. The literature base from which this was created was more specific to each individual element and is also encouraged to be studied according to each individual’s knowledge gap.

Contact the author:
E-mail: hbs@sun.ac.za
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